Liquidity concerns, dividend futures, and denying access

Thursday 9th April 2020Justin Cleveland

Because of how superannuation investments are structured, liquidity could certainly become a concern if there is excessive demand.

Notably, it was revealed that Hostplus recently included a clause in their PDS that would give the fund the option to deny or delay switches or withdrawals. Ostensibly, this is a stop-loss method that would prevent a liquidity problems that could come from making sales of long-term investments during extraordinary times. Like, now. The fund has said that they have no liquidity concern and the changes are routine.

What’s clearer now is that there are several funds that include similar clauses. Finding a buyer for an unlisted property asset, like a shopping centre, is going to be a lot more difficult considering the severe retail restrictions and down economy.

Liquidating shares, even in a down market, is still feasible. Relying on dividends, however, may be a problem. Scott Kelly, portfolio manager at DNR Capital, says that over half of ASX 200 companies have downgraded or withdrawn future earnings guidance. “Company dividends are also likely to come under pressure as management teams and Boards respond to the disruption and severity of the COVID-19 outbreak.”

Moreover, State Street’s head of macro strategy EMEA, Timothy Graf, says traditional safe-haven diversification vehicles are behaving very strangely. “In times of extreme market turmoil, correlations between assets often rise sharply, but exposure to safe havens like gold and the Japanese yen (JPY) can diversify away some of this risk. This is not the case today.

“Over the last two weeks, the average pairwise correlations across global equities, US investment grade credit, gold and the JPY (vs USD) have experienced a larger spike than anything seen during the 2008 crisis.”

Last week the government started probing fund liquidity. While they may put in place measures to ensure we don’t run into a situation like this again in the future, it doesn’t allay all concerns about the liquidity issues we may experience in the coming months.